Yesterday the Wall Street Journal described an internal FOMC debate between those wanting more stimulus and those anxious about the Fed's already bloated balance sheet. The Journal reports that the decision at the last FOMC meeting to replace retiring MBS with long-term Treasuries represented a compromise between the two factions.

That helps explain Federal Reserve Bank of Minneapolis President Narayana Kocherlakota's odd suggestion that markets misinterpreted the Fed's ever-so-slight monetary easing as a signal that the FOMC had big concerns about real economic activity going forward. I scratched my head when I first read Kocherlakota's remarks, since I had thought any surprise in the FOMC actions was that the FOMC seemed to be less worried than many private analysts. But if you believed, as Kocherlakota seems to, that the Fed has already done too much, his remarks might make more sense.

Another interesting aspect of the WSJ report is the process by which it got into the Journal in the first place: someone on the FOMC wants more of the internal FOMC debate out in public. And why might you want to do that, if you were on the inside? One objective might be to try to change the dynamics of the debate in hopes of hastening a resolution. Another would be to help the public understand the FOMC's recent minutes and communications like Kocherlakota's. And a third objective could be to begin the process of communicating that a change is in the works.

I have suggested that ongoing deterioration of economic conditions will be the critical factor that triggers the Fed's next move. On this, Exhibit A might be today's report that new Home sales set an all-time low in July. The good news, such as it is, would be that residential fixed investment was already so low that it accounted for only 2.5% of total second-quarter GDP.

Source: Calculated Risk

But in addition to the direct effect on GDP, there may also be financial ramifications of the new downturn in real estate. Today the Wall Street Journal reported:

Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC.

Add to these yesterday's report that existing home sales fell 27% in July from the downward-revised June numbers, with single-family home sales at the lowest level in 15 years. As usual, that's just what Bill McBride had told us was going to happen.

Source: Calculated Risk

Which is one of the reasons I pay attention to Bill's interpretation of the WSJ story on the FOMC debate: he reads it as paving the way for Quantitative Easing 2.

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